The crew of the "Ash" was forced to abandon ship when the 1,000-tonne motor vessel took on water, after colliding with the tanker which was five times its size.
An anti-pollution operation is underway as the tanker leaked 83 metric tons of oil.
Five crew members were rescued by the crew of the tanker, while a sixth was forced to escape from his cabin as the vessel sank.
The Dutch-registered Aquamarine, which was carrying a cargo of vinegar, collided with the Ash, laden with steel.
After the sixth crew member managed to struggle free, he floated to the surface, where the Solent Coastguard helicopter rescued him.
The master who has not been named, was airlifted to the Conquest Hospital in Hastings where he died.
A Dover coastguard spokesman said the Ash sank straight to the bottom of the 35-metre deep sea, leaving debris floating on the surface.
"We don't yet know how the collision happened and the crash site is just off our radars.
"It looks like one went into the back of the other but the ship carrying steel simply sank to the bottom of the Channel," he said.
Criminal charges
The collision took place at 1535 BST, with the rescue bid launched after a mayday call from a crew member of the Ash.
When rescuers arrived with six boats and a helicopter, they searched for almost 30 minutes.
Maritime and Coastguard Agency spokesman Mark Clark said: "The death of the master puts a very serious light on the accident.
"Our enforcement unit will now be working closely with the Marine Accident Investigation Branch to see if any criminal proceedings should be brought."
The 4,700 tonne Aquamarine sustained a dented bow, but was able to continue on to Swansea, Wales.
A coastguard aircraft was flying over the scene on Tuesday to assess the size of the oil spill.
An emergency towing tug, the Far Turbot, is remaining at the site to warn other ships of floating debris from the Ash.
At the time of the accident there were force five winds but visibility was good and there was no rain.